Q1 2024 Plains GP Holdings LP Earnings Call

Participants

Blake Fernandez; VP, IR; Plains GP Holdings LP

Willie Chiang; Chairman of the Board and CEO; Plains GP Holdings LP

Al Swanson; EVP and CFO; Plains GP Holdings LP

Jeremy Goebel; EVP and Chief Commercial Officer; Plains GP Holdings LP

Michael Blum; Analyst; Wells Fargo

Spiro Dounis; Analyst; Citi

Keith Stanley; Analyst; Wolfe Research

Sunil Sibal; Analyst; Seaport Global

Neal Dingmann; Analyst; Truist Securities

Jeremy Tonet; Analyst; JPMorgan Securities

John Mackay; Analyst; Goldman Sachs

Bruce Chan; Analyst; Barclays

Presentation

Operator

Thank you for standing by, and welcome to PAA and PAGP's first-quarter 2024 earnings conference call. (Operator Instructions)
I would now like to hand the call over to Blake Fernandez, VP, Investor Relations. Please go ahead.

Blake Fernandez

Thank you, [Latif]. Good morning, and welcome to Plains All American first-quarter 2024 earnings call.
Today's slide presentation is posted on the Investor Relations website under the News and Events section at plains.com. An audio replay will also be available following today's call.
Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on slide 2. An overview of today's call is provided on slide 3. The condensed consolidated balance sheet for PAGP and other reference materials are in the appendix.
Today's call will be hosted by Chairman and CEO, Willie Chiang; Executive Vice President and CFO, Al Swanson; as well as other management members.
With that, I will now turn the call over to Willie.

Willie Chiang

Thank you, Blake. Good morning, everyone, and thank you for joining us.
Our strategy remains consistent and is anchored around capital discipline, generating free cash flow, return of capital to our investors, and financial flexibility. And consistent with those themes, earlier this morning, we reported first-quarter results that are in line with our expectation, which reflects progress towards our full-year 2024 targets, and provides us with confidence in our ability to deliver on the plan that we laid out in February.
For the first quarter of '24, and as illustrated on slides 3 and 4, we reported adjusted EBITDA attributable to PAA of $718 million, and we reaffirmed our 2024 adjusted EBITDA outlook. Al will share additional details on our quarterly performance and the 2024 outlook -- in our press release this morning and as illustrated on slide 5.
We had increased contract volumes and extended the term on certain contracts such that our weighted average contract duration of our Permian long-haul portfolio approximately five years, which takes us through 2028. This includes new contracts or extensions on Cactus I, Cactus II, Basin and Sunrise. This also includes transactions related to 200,000 barrels a day day of Cactus I capacity that has been finalized on terms that are consistent with the rates in the range of $1.25 to $1.50 per barrel that will become effective in September of 2025.
Today's announcement is a win-win for both Plains and our partners, and it strikes a good balance between term commitments and maintaining flexibility to capture higher margins from uncontracted long-haul capacity over time. While we are not providing formal guidance for '26, we would expect continued underlying growth in the business and contributions from efficient growth investments to offset the lower contracted rates, which results in a broadly flat adjusted EBITDA in 2026 as compared to 2024 guidance for the crude segment. In summary, we believe these actions should provide greater clarity and confidence in the outlook for our crude oil segment and our ability to continue to generate significant free cash flow over multiple years.
Consistent with our efficient growth strategy, and as summarized on slide 6, Plains acquired an additional 10% in the Saddlehorn Pipeline Company LLC and the Mid-Con terminal asset for an aggregate cash consideration of approximately $110 million. These bolt-on acquisitions are expected to generate unlevered returns in line with our return threshold for approximately 300 to 500 basis points above our weighted average cost of capital, in addition to enhancing our position in both the Rockies and the Mid-Con.
With that, I'll turn the call over to Al.

Al Swanson

Thanks, Willie. We reported first-quarter adjusted EBITDA, net to PAA, of $718 million. Slide 10 and 11 in today's appendix contains walks that provide details on our first-quarter performance. Our outlook for the balance of the year remains essentially unchanged, and we are reaffirming our adjusted EBITDA guidance range of $2.625 billion to $2.725 billion for 2024.
We continue to believe the Permian will grow 200,000 to 300,000 barrels a day, with the back half weighted ramp providing momentum for the remainder of 2024. The NGL segment remains highly hedged with frac spreads at approximately $0.65 per gallon for 2024.
A detailed overview of our 2024 guidance and key assumptions, which remained generally consistent with our February guidance, are on slide 12 within today's appendix. For 2024, we expect to generate $1.55 billion of adjusted free cash flow, excluding changes in assets and liabilities, and including $110 million of bolt-on acquisitions, with approximately $1.15 billion to be allocated to common and preferred distributions.
We will also continue to self-fund our targeted $375 million and $230 million of growth in maintenance capital, respectively, net to PAA, which is consistent with our February guidance and includes capital per POP JV, well connections, and intra-basin improvements, as well as capital related to our project.
Wit that, I'll turn the call back to Willie.

Willie Chiang

Thank you, Al. Over the last several years, we have made considerable progress across several initiatives, including running a safe, responsible, and reliable business, remaining capital disciplined, generating meaningful free cash flow, and increasing the return of capital to our unitholders, while maintaining financial flexibility.
Our business model and asset footprint span key supply basins in North America and provide infrastructure solutions to supply global energy demand needs. Combination of our asset base and our strategic initiatives really creates a unique value proposition for our current and potential unitholders, including a double-digit adjusted free cash flow yield and a distribution yield of approximately 7% to 7.5%, with a multi-year targeted annual increase of $0.15 a unit.
We're pleased to be able to provide the update on our Permian long-haul contracting efforts, which reflects our commitment and focus on being the partner of choice and creating win-win solutions for our customers and partners. Recontracting of our long-haul capacity has been a focal point for investors, and we view the developments that we share with you today as a significant milestone, offering better visibility and clarity around the contractual support for the performance of our Permian long-haul portfolio in the coming years.
The bottom line is, we're well positioned to continue to generate significant free cash flow well into the future.
I'll now turn the call over to Blake to lead us into Q&A.

Blake Fernandez

Thanks, Willie. As we enter the Q&A session, please limit yourself to one question and one follow-up. For those with additional questions, please feel free to return to the queue. This will allow us to address questions from as many participants as practical in our available time this morning. The IR team will also be available to address any additional questions.
Latif, we're ready to open the call for questions, please.

Question and Answer Session

Operator

(Operator Instructions) Michael Blum, Wells Fargo.

Michael Blum

Thanks. Good morning. So I guess first question I wanted to ask was just, I guess, on the guidance, you had a strong Q1. You had the bolt-on acquisitions. So maybe just talk through why not increase the '24 guidance and streamline the thinking there. Are you -- would you say you're on track to beat the $0.15 per year of distribution growth, given that seems looking at the bolt-on the business is running well? Thanks.

Willie Chiang

Michael, thanks for the question. This is Willie. It is early in the year. We are confident about being in the range and really just don't want to get too far ahead without seeing a few more things. But we do remain confident of our performance this year. And I would characterize it as cautiously optimistic that it will be able to perform well into the range.

Michael Blum

Okay, understood. Thank you. And then I was wondering if you can comment on the rates for the contract extensions for Cactus II and Sunrise Basin [rates] and just extended the duration, or did you also see changes in the rates there? Thanks.

Jeremy Goebel

Michael, good morning. This is Jeremy Goebel. What I'd say out of the rights to the Mid-Con is, the reason we were looking to contract those long-term rate as it got towards tariff. So effectively, folks are paying tariff to get there, and that's the right balance for us for long-term rate.
On Cactus II, the extensions are associated with contract expansions associated with their -- the options to extend. So they basically elected their options to extend the existing contracts.

Michael Blum

Thank you.

Operator

Spiro Dounis, Citi.

Spiro Dounis

Thanks, everyone. Morning, everybody. So maybe just want to go back to the 2026 comment, really totally appreciate you're not giving guidance today. But just kind of want understand maybe what underwrites some of the view on sort of flat over time. Just thinking about things like how you think about basin growth of the next few years and then just other things around M&A. Obviously, you've been active on that bolt-on front. I assume no M&A from here. And then also, you mentioned some lines of spot upside from some of these open volumes. I imagine that's all upside to that you as well.

Willie Chiang

Yes, Spiro, it's as you well understand, there's a lot of variables that go into this and it would be it wouldn't be it would not be a good guidance. If we can trying to look to 26 to see all those things that you know that tightness in supply and demand on the capacity, operating costs of production, there's a lot of things that go into.
And while I'm not going to break out everything there, what we were trying to do is as we think about our businesses and 26 without significant changes from where we are today, not large investments that we've put in some not gross, not spikes in production. We've kind of talked about 200,000 to 300,000 barrels a day of growth in the Permian kind of over the next number of years. It's really trying to put a normalized view on 2026 based on how we're operating today.
And the point that this was really to tried to quantify the impact, not exactly. But there are some folks that believe that the renegotiation would have resulted in a significant reduction to the point where we could catch up. And we're trying to say is really we're going to be generally flat in 2026, which is really the first full year after the contract renegotiation. And it's always our jobs to work hard on improving that.
So as we get closer, we'll be able to get better better forecasts on it. But again, it's really to quantify what we think the range as we expect to be broadly broadly flat with 2024 and 26. And there could be upside just as there could be downsides and more resolution will come as we see more. But you have understood appreciate that.

Spiro Dounis

Willie. Second question, maybe just go into NGL just out for 2025 and then more broadly. Are longer-term, curious if there's any opportunities over time to reduce that commodity exposure through contracts?

Willie Chiang

Just on the first part of the question is we're actively monitoring our hedging profile of trying to be optimistic at liquidity increases significantly up. You get outside of six to nine months, so in as well as very largely backwardated. So for us where we had average, let's say it doesn't make sense to hedge that point of a forward basis. We had some the as it was higher, but it's minimal at our pain as opportunistic as liquidity gets higher margin higher than the front end of the crude markets roll up.
And as gas prices moderate, you get to points where we're heading in. But the point that I can give any guidance on it, but that just gives you an assessment of right now, the forward curve is suggesting we should do it and liquidity out there to do anything to us.

Jeremy Goebel

Spiro, as you know, we've got some additional capacity that's coming on in Fort Saskatchewan, and that is consistent with your question on how do we get them shift more towards a fee-based, consistent cash flow stream. So that's always our objective. It's just you got to be smart about how you go about it and pick the right times to connect practice. Perfect alignment ever today.

Spiro Dounis

Thanks, gentlemen.

Operator

Keith Stanley, Wolfe Research.

Keith Stanley

Thanks. Hi, good morning. When when you look at the portfolio now after today's announcement there, are there assets at all that you would call out aside from maybe Bridge Tex where contracts are still meaningfully above market or are we at the point now where your contract rates are all pretty much more or less in line with where the market would be?

Jeremy Goebel

Keith, this is Jeremy. I would say that your assessment is correct. That bridge taxes, the one that's outstanding operating pipeline out of the better question for a while. But one thing I would say as BridgeTex demand is increasing. And so one thing, the papers and who is went to a lesser just extended development, which has led to more demand for brands that you've got the downtime on Wink to Webster.
And so longer term, we see that at a healthy pipeline with opportunity and we control the capacity between Nevada, Colorado City to leasing benefits as volumes increase as well. This is our ability I would add to what Jeremy said is we assumed and made our assumption in the broadly flat 2026. The BridgeTex impacts as well.

Keith Stanley

Okay. That's helpful.

Jeremy Goebel

And then just a small clarification anyway. Spiros question. Just the the 2026 crude segment EBITDA being being flattish. I just want to make sure that doesn't include any bolt-on acquisition assumptions or use of free cash cash and that way, right. It's more just organic growth through the company. Nothing major.

Keith Stanley

Okay. Thank you.

Operator

Sunil Sibal, Seaport Global.

Sunil Sibal

Hi, good morning, guys. Can you give me, Alex? Yes, we can now so on on the Permian, the contracting. So thanks for that update. And I was kind of curious, you know, since this was a major milestone and now that you have this behind you, how does that if any impact you're kind of a longer-term capital allocation strategy?

Al Swanson

So yes, the capital allocation strategy doesn't change, right? Our leverage is worth. We wanted to be we set a new range are maximize free cash flow. We expect our CapEx to be in that three to $400,000 to drill three to $400 million range per year. We do look for opportunities that are high synergy, high return synergy opportunities for bolt-ons and will continue to look for those opportunities. We think they're accretive and we can we can execute in a moment on that.
And then the focus is, again, return of capital to unitholders. And I think Yes, Tristan did ask the question. If we perform better than we would certainly consider on an increase above our target as we have done in the last couple of years.

Sunil Sibal

Understood. Then on Permian, seems like, you know, weather-related events kind of led to a sequence to decline in volumes. I was kind of curious where things stand today. I have seen enough recovery from those, obviously are the including in your full year expectations. But I was just kind of curious what the outcome, what are you seeing in the basin?

Jeremy Goebel

Neil, this is Jerry. At there was an impact in January, February for about two weeks as it was the freight volumes have recovered. There's been some issues with gas outages throughout the basin that has caused some impact, but by-and-large is in line with expectations. There was a big growth impacted big growth in the fourth quarter last year, which we expected flattish in the first part of this year, growth in the second half of the year until we're not changing our outlook at all based on the normal impact of additive.

Sunil Sibal

Okay. And just one clarification. So based on what we are seeing in gas prices and gas constraints, you are not expecting any, you know, and it seems so that's the second half number to go. If I understand, there is a gas pipeline coming online so that potentially in your mind, hubs resolve the constrained and kind of gets us the second half uptick in production that trip that that is very fair.

Jeremy Goebel

It's one way to look at it. The other is by gas prices are low. It doesn't impact all shippers, right? And some of that for transporting the vast majority data, which at the place modules, I guess, trying to get out of the base. And the other part of it is a gas prices are like that in the capital allocation to oilier areas, lower GOR areas, but generally benefit, Vishal for us. So it's not all that.

Sunil Sibal

Understood. Thank you.

Operator

Zach than ever and of TPH & Co.

Perfect. Thanks for taking my questions. That any can you guys provide any insight into the contract profile underpinning the pipe for those fairly long dated? Or were there will be some rolling the next few years?

Willie Chiang

I think that's a question of the operator went out and say we're very comfortable with the acquisition price and long-term outlook as outlined.

Okay. Perfect. And then one kind of outside of your business realm, but you know, we're seeing more and more producers and midstream talked about 2026 being very potentially constrained year on the gas side. Have any of your producers expressed any concerns or talk through now too years with gas constraints may be coming back in 2026?

Willie Chiang

I think in general, all the conferences causing came in at so far is that there's a general need for another pipeline. You mentioned historically do pipeline. As I said, we expect that to happen. If anything would be trending and it would be quarter that wouldn't be here. And in our view, remember were just talking about the last pipe. We're not talking about the whole base of production. So you delay 100,000 barrels a day and for the six months, that's 100,000 barrels a day at a at that time, close to 6.5 million barrels a day. It's a very minor in that the total base.

Got you. Perfect. I appreciate it, guys.

Operator

Naomi microphones here of UBS.

Hi, good morning and appreciate the color that I don't want us to the question. Tests are under contract into 2025, but can you talk about perhaps how the five-year contract structure in 2020? It needs a massive amount of flexibility in the future prospects of the business, particularly around experts? Can you do talk about the opportunity set that you're looking at at this?

Willie Chiang

Jeremy at?

Jeremy Goebel

I'm not sure I fully understand the question, but what I would say is at a staggered work we had in the average into the duration of the durations move over different years, and we like to stagger contracts. And our intent is to continue to stay with long-term exporters and refiners that are contracting pill burden that has that profile will actively manage it with a opportunity set of eyes will be needed to Permian oil in place as a big number, and we'll have production for a long time. So it doesn't concern us fund business was how we were able to get to the right balance of time, tenure and rate and will continue to make has that profile over time. In Naomi.

Willie Chiang

This is Willie, as we talked with our with our customers and our partners on this at this all fits their or their profile production. And if you think about it, you've got a limited amount of infrastructure that's going to these markets now. And some would like to think that the relationships are strong and and that the customers will be sticky because Tom, the offering that we have fits what they want to do. And so it's not a matter of people wanting to shift a completely different markets. I would think that we are the partners that will continue to have those, and it's really a renegotiation of Chairman and tenure and tariff at that time.

That has had said on maybe as a follow up, how should we think about Permian production cadence for the remaining of the U.S.? Should we expect for gathering bolt-on transactions to drive production given the increased activity?

Willie Chiang

I think we've done we've shared that our expectations for the Permian really are 2 to 300,000 barrels a day of growth from the end of the year to the end of the year to 23, 24 minutes, really back half, but Q3 and Q4 that we'll see the increase a time.

Thanks to the kind of a patron.

Operator

Neal Dingmann, Truist Securities.

Neal Dingmann

Good morning, guys. Thanks for the time. My first question on your Canadian in past quarters on the Canadian crude spreads and NGL markets, I'm just wondering how are those continuing the trend? Are they still up into the right is a bit?

Willie Chiang

So our view is the same as our outlook for the year. We tried to bring those down on the marketplace opportunities of TMX startup. So it's in our view, the impact is included in our guidance. And what I would say is we view that as positive long-term for our Canadian assets, it is more production growth and you're probably in a constrained environment again in two to three years. So we think more volume will be good for those assets on both the NGL and crude side.
And while there may be fewer market-based opportunities because these are tariff-based opportunity. That's great to hear. Then just quick quick one. Just what you've just mentioned on that for me to add is also that site that movement to the West Coast, that kind of reorganized and how things move with the U.S. to make up for that for those barrels are coming into the U.S. So that could create other opportunities for us. However, other pipes in the Mid-Continent.

Neal Dingmann

Great. And then I was just asking on you just mentioned on Permian growth is majority that's still going to come from the Dell. I think last quarter you talked about maybe 100, 70 Dell rig, first of all, the Midlands. So is that still kind of you don't anticipate that being the case for the remainder of the year?

Willie Chiang

Yes, activity balance hasn't really changed very much, but we do see some growth in the Midland Basin, but we think it was a disproportionately in the Delaware Basin.

Neal Dingmann

Helpful. Thank you all.

Operator

Jeremy Tonet, JPMorgan Securities.

Jeremy Tonet

Hi, good morning. But just wanted to come back to the recontracting, if I could, and wanted to better understand. I guess when you say if it can terms consistent with rates, what that means exactly. Does that mean like there's a higher amount contracted at a lower rate? Or is there something I was just wondering why it's consistent with rates and not just those that the rate.

Willie Chiang

Well, some mix of what we've got and it's what we don't really want to get into the specifics of every pipe and what the tariff is. I think the key point on that, Jeremy, is if when you look at the recently built pipes, it's above 25 to about 50. And essentially what we're telling you is that we've been able to recontract successfully with our partners at it, right? Is that are competitive with that and going forward, I think it's a reset and that we don't have we have less that are far out of market as we go forward. And as the face of Titan's, we would expect that that could be some pressure upwards on that.

Jeremy Tonet

Got it. That's very helpful. Thank you. And then just wanted to come back to the guidance, if I could appreciate that early in the year and you don't want to move it just yet, but with the acquisitions, you know, presumably bringing upside to results for the year. Are there other, I guess, headwinds that have materialized so far that would be an offset or just trying to better understand the gives and takes are just as the year progresses?

Al Swanson

Jeremy, this is out of the acquisition of the 110 is the impact that will be seeing this year would be very modest and well within the range. We have our base businesses performing in line with expectation, as Willy mentioned in his prepared remarks. So if you run the math on 100 million and recognize that it's only a partial year, it was not enough for us to to allow for in our business. But our business is performing in line with what we expected.

Willie Chiang

Hey, Jeremy, this is Will you just a clarification, the specific dollar 25 to about 50? That was really around Cactus one, how we've got other pipelines that are in the mix and we have a weighted average concept that we look at. But it really is the $1.25 to above 50 is really just the Cactus one recontracting.

Jeremy Tonet

Got it. Very helpful. Thank you.

Operator

John Mackay, Goldman Sachs.

John Mackay

Hi, guys. Good morning. Thanks for the time. I just figured now that you're having some conversations with our shippers around kind of back half of the decade, volumes and rates would just be curious, is there anything you can share on how the market's developing for for a kind of Houston versus Corpus dynamics, whether or not some some of the big export projects proposed out there kind of playing in those conversations? That percentage?

Willie Chiang

I would say they had absolutely no impact on the discussions that we had. I think the view of the offshore export facility until you have to think about there's already a couple of million barrels a day at Houston and close to three you head into Q2, TriZetto. Those balances may not change very much and have production growth in between.
We're talking about a project three to four years from now where he could have half a million, 800,000 barrels a day more production. I think you're going to move in when less efficient docs offshore maybe takes on production growth, but you'll still be folded corporate. So I don't it didn't impact the discussions at all, and it's more of an and as opposed to or but that's not fair.

John Mackay

Maybe I'm just one last one. Maybe just another comment on the weather challenges or otherwise. And first quarter green, understand kind of general Permian directories intact. We're looking at kind of Permian gathering versus long haul. Was there more of an impact on one versus the other arm? And maybe just how we think about the and our 2Q trajectory versus a second-half pickup?

Jeremy Goebel

This is Jeremy. The way I'd look at this is the gathering was more impacted by weather markets impacted the long haul. It's just a matter of or the bid, was it better for our shippers to buy at Midland Basin by at the end of the high or at the dock and have sometimes they'll just change their behaviors and how they ship. And it could be it measure of what our inventory and Cushing and water demand and turnarounds in Cushing's has a long hauls impacted by market. The gathering this quarter impacted by the the weather.

John Mackay

Thank you.

Operator

Bruce Chan, Barclays.

Bruce Chan

Good morning and thank you for taking my questions. First, I wanted to ask about the on upcoming maintenance on, I think what Sara and how that might translate to incremental until we put on basin pipeline and meeting you're pushing assets, given the spot capacity there. Is that an opportunity for incremental earnings either from a trip and solving metric perspective or marketing optimization?

Jeremy Goebel

So Theresa, this is Jeremy though, and look at the 10 days of scheduled downtime as there's ways to get it out, right, a lot of that will that. So export price to the Gulf Coast will be full or some capacity there developed you need to get to Colorado City, which we can assist with available, likely flow. So on and BridgeTex as a result of ladies western being down to use a more rigorous expos or Colorado City flows, but when it gets to Colorado City related to see more basin flow. So I think all three of those could happen.
Plus, you'll see a significant flows through all the corporate space. They're spread on and on and WCS plant as our TMX's landfilling, we're seeing the differential come in at this point. Give us some color on how that's impacting at new marketing activities. And maybe just broadly looking past this and if you have a goal, Tom, on and the magnitude of impact that differential on WCS specifically and tax the crude segment just from a quarter-to-quarter basis, not be helpful.
Basically, I don't think we'll give specific guidance, but what I would say it will be included in our outlook. I'd say there's plenty of ways for us to optimize around our assets between rate other than WCS, seven basis points component of that marketing activity in Canada. But there also will be storage opportunities and other things as it starts up, no pipe pipelines complicated that will have difficulty starting up and it will create opportunities also flow changes that magnitude away from the U.S. So it may end up more tariff-based appetite, less market-based opportunity, but we would expect the market based on Trinity's come back as Canadian production growth. three side.

Willie Chiang

This is Willie. I think the key point on this, as we've always said, with the with the shift in flow, when you announced 4 to 600,000 barrels a day, potentially short term, that could be some blips long-term. We think it's very healthy because it says good price signals to the Canadians to develop more resource. And it's quite frankly, a great opportunity for that for the Canadian resource base to increase.

Al Swanson

And this is Alvin thing I would add is that it's actually coming online in the stuff that's happening pretty well in line with what we assumed in our original February guidance.

Bruce Chan

Got it. Thank you.

Operator

Thank you. I'd now like to turn the Kmart, sir.

Blake Fernandez

Thank you. As always, we enjoy a visiting with you. Thanks for dialing in and your your your ongoing attention and support of what we're doing. We look forward to seeing you out on the on the road talking to you soon.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.